1. Some new equipment under consideration will cost $2,300,000 and will be used for 3 years. Net working capital will experience a one time increase of $541,000 if the equipment is purchased. The equipment is expected to generate annual revenues of $2,300,000 and annual costs of $736,000. The project falls under the five-year MACRs class for tax purposes, the tax rate is 30 percent, and the cost of capital is 14 percent. The project's fixed assets can be sold for $552,000 at the end of the project's life.
a. What is the book value of the equipment at the end of the project's life? Round your answer to the nearest whole dollar.
b. What are the taxes on the sale of the equipment at the end of the project's life? Be sure to indicate clearly if taxes are owed or if there is a tax benefit. Round your answer to the nearest whole dollar.
c. What is the net cash flow for Year 3? Round your answer to the nearest whole dollar.
2. Vivian has $215,000 invested in a stock that has a beta of 0.5 and $260,000 invested in a stock with a beta of 1.6.
a. If these are the only two investments in her portfolio, what is her portfolio's beta? Round your answer to two decimal places.
b. Use the capital asset pricing model to find the expected return on Vivian's portfolio if the market risk premium is 4.8 percent and the risk-free rate of return is 4.2 percent.
3. The covariance between Sterling Construction Company's (Ticker: STRL) returns and the market's returns is 0.001398166763. The variance of the market's returns is 0.001904406. The covariance between Sterling Construction Company's returns and OSI Systems's (Ticker: OSIS) returns is 0.002438541. Sterling Construction Company has a variance of returns of 0.0184624 while OSI Systems has a variance of returns of 0.0126008. Sterling Construction Company has an average return of -0.049108 percent while OSI Systems has an average return of 1.60948 percent.
a. Calculate and interpret Sterling Construction Company's beta. Round your answer to two decimal places.
b. Calculate the standard deviation of returns for a portfolio consisting of 50 percent Sterling Construction Company stock and 50 percent OSI Systems stock.
|
MACRS Depreciation Allowances
Property Class
|
|
Year
|
3-Year
|
5-Year
|
7-Year
|
|
1
|
33.33%
|
20.00%
|
14.29%
|
|
2
|
44.45
|
32.00
|
24.49
|
|
3
|
14.81
|
19.20
|
17.49
|
|
4
|
7.41
|
11.52
|
12.49
|
|
5
|
|
11.52
|
8.93
|
|
6
|
|
5.76
|
8.92
|
|
7
|
|
|
8.93
|
|
8
|
|
|
4.46
|